Commodities are in year two of a five-year correction: Canaccord

Established in 1950, Canaccord rose to prominence under the leadership of former CEO and now honorary chairman Peter Brown. For decades, the company was synonymous with Canadian venture capital and natural resource finance.

Under the current leadership of Reynolds, the company has evolved into a diversified global financial institution, with some 2,300 employees spread out across 13 countries. At home in Canada, Canaccord is the largest non-bank-owned investment dealer in the country.

Reynolds got his start as a broker in Vancouver in the 1980s. He made a name for himself financing early-stage natural resource and technology companies, and eventually became an institutional salesman for Canaccord, building out its London office as president of its UK operations. In 2007, he became the firm’s president and CEO of global operations.

Reynolds enjoys a sterling reputation and, with the help of his team, deserves much of the credit for Canaccord’s evolution. These days, he’s pushing the company into the more conservative business lines of wealth management and corporate finance — through strategy and acquisitions, he’s diversified the firm away from natural resources.

“Originally, the mining venture area was our only product — today it’s one of the many areas of our diverse global business,” Reynolds told me by phone Wednesday. Last quarter, Canaccord’s revenues were split 75% on the capital markets side and 25% in wealth management. “There’s no strategy to make them equal. Our goal is to just increase our market share in both.”

Canaccord’s future growth will come predominantly in the wealth management space, according to Reynolds. “Clients are looking for less volatility and more of a holistic approach to their portfolio. It’s clear the whole industry is going that way, and that’s why we’ve made considerable investment in our wealth management platform,” he said.

In addition to recruiting established IAs and investing in new advisor training programs, the company looks to make small, bolt-on acquisitions, where there’s value. Canaccord continues to grow in Asia, and is considering an expansion of its wealth management platform into Singapore.

While he’s bullish on the wealth management business, Reynolds is less optimistic about Canada’s resource sector. “I think the sector is going to go through a difficult period over the next few years,” he told me. “I think exploration expenditures will shrink because very few investors have made any money in that sector for a couple years now. The last time we saw a major downdraft in this sector in ‘96 – ’97, it didn’t really start picking up until 2003. That’s quite a long period of being out of favor. I think we are now two years into a five-year correction… I personally think gold is going lower, and that commodity prices will be under pressure for at least the next year or two.”

Reynolds’ strategy this past decade to diversify the firm away from mining and energy has paid off. “Our capital markets and M&A teams now are more diverse, and our US and UK businesses are much less reliant on resources than the Canadian practice. As the market rotates here in Canada, I think you’ll see the resource sector become less of the TSX indices. But we’ll continue to do well because of our investment banking and research depth in other sectors.”

“Of the Canadian independent dealers, we’re by far the strongest financially. I think the industry is going through a contraction, and a lot of the smaller guys will be challenged to stay in business. But the strong will survive, and increase their market share,” Reynolds said. “The barriers to entry are certainly making it harder for people to start new securities firms. Regulations are only getting tougher, the costs of doing business are getting higher, and the big banks control 85% of the market share already. We control a lot of what’s left.”

On the subject of regulation, Reynolds continued, “There are a lot of potential new regulations that could come into effect in Canada. If all of these regulations are realized, it’ll put a damper on the junior end of the Canadian marketplace, and you could see a lot of that sector getting choked off. But these proposed rules are all about transparency and protection for the client. They are similar to regulations already in place in the UK and Australia. I don’t think we’ll see a brain drain of our mining and energy talent, just an evolution of how they do business.”

As for his advice to young investment professionals, Reynolds commented, “Going forward, if you’re an advisor, and you just have a transactional, brokerage type of business, it’s going to be difficult to earn a good living. You’ve seen commission compression and a lack of volume, both on the institutional and private client side. The guys who are growing have a balanced, fee-based book of business.”

On what makes a great investment professional, Reynolds told me, “It’s a cliche, but if you always put your clients’ interests first, you’ll be successful. That applies to any career.” Indeed, while Canaccord has expanded beyond the junior resource sector, the firm’s clients are likely the better for it.

For more information, visit Canaccord’s Web site.